Why Apple shares are dirt cheap

“As Apple prepares to report its fiscal second quarter results after the bell on Wednesday, a huge question on investors’ minds is whether or not the stock’s multi-year run will finally come to end. While nothing is certain, there is good reason to believe the bearishness in Apple is over, and that a new powerful rally is looming on the horizon,” Andy M. Zaky writes for Fortune.

“If Apple is trading anywhere near the current price level come Thursday morning, the stock will become just as undervalued as it was during the financial crisis,” Zaky writes. “Why? Because unless Apple’s stock absolutely skyrockets over the next few trading sessions, its trailing price-to-earnings ratio — currently at 18.5 — is going to significantly contract due to the near 100% rise in quarterly earnings expected out of the company tomorrow.”

Zaky writes, “Apple’s trailing 12-month earnings per share is expected to rise from the current level of $17.92 to nearly $21.00 this week. This means that in order for Apple (AAPL) to maintain its already depressed P/E ratio, the stock would have to rise to $388.50 by Thursday. And that would only keep the stock trading at an 18.5 P/E ratio, which happens to be at the lowest end of its historical two-year range.”

Read more in the full article here.

[Thanks to MacDailyNews Reader “krquet” for the heads up.]

14 Comments

  1. All you need to know is that Apple made $3.33 a share last year this quarter. Based upon Zaky, Muller, Dediu, Tello and Leitao, all excellent amateur analysts, one should expect earnings of about, $6.35 a share this year.

    That’s a 91% earnings beat. What company the size of Apple, with over $100B in sales, is growing earnings at 91%? None. Why are they being priced at 18 and a half times earnings? It’s nonsensical. Apple’s historical trading range is 20 to 30 times earnings.

  2. Clarity. As Apple starts doubling their sales and profits, the more ridiculous and sad the devaluating of the AAPL stock becomes. I am over invested in Apple because there is no other investment that has little to no down side. Apple has become the 4th largest PC supplier in the USA. When companies leave free choice to the smart phones, 92% buy the iPhone. And still no iPad killer or iTune killer in sight. And where are all the SAFE Android apps and what makes them better than those for iOS. And we haven’t talked about the BILLION DOLLAR SERVER FARM yet. Someone ask Wednesday, “Why did you build that and are you ready to turn it on?”

    1. ive been saving this just for you. It’s a big secret! Dont tell. The server farm is going to allow iOS to cut the cord to iTunes. It will allow you to sync ( and update iOS) over the Internet rather than tether to your home pc. You heard it here first.

  3. One can only speculate if by future strategic acquisition with the cash horde, Tim Cook and Jobs really meant Apple. Unthinkable, huh? Thought so. But that’s a way to keep the Toni’s of the world bitch-slapped. Adults are playing here.

  4. Men & Ladies the past week has been a very good time to Buy AAPL shares 🙂 Buy at the dip low on a great Company as AAPL.
    Next year it will be the #1 biggest Inc in the world and Exxon is #2!
    The Big long term picture is that by Dec 2011 AAPL = $422 then add $101/year!!!!
    2015 = $828 per share?!!
    Record Profits again tomorrow 🙂

  5. No Apple should be trading at over $600.00 a share or more. I don’t see how Google is valued more on the market than Apple when Apple is much larger in every way possible. It makes no sense, just like all of these supposed Anal-ists!

    1. “I don’t see how Google is valued more on the market than Apple”

      It’s not.

      Google is valued at: $167.69 Billion
      Apple is valued at: $311.26 Billion

      “Market Cap”, the definition is your friend.

  6. One thing to keep in mind is that as Apple grows, inherently, the PE should experience downward pressure. This is exacerbated by the tremendous and ever growing cash horde.

    Back when Apple had a much lower market cap, the attracting to invest in it was much greater because the potential payoff was so great. It was easy to see how an investment in Apple could double, triple or more in a very short period.

    However now that the market cap of Apple is so high, it’s harder to get investment that would match the earnings growth. In other words a doubling in earnings for a small company with a bright future (which Apple was), would drive a much higher market cap than a doubling in earnings for a large company that still has a bright future (which Apple has).

    The other factor is that while earnings are growing, the earnings from cash are weighing the company down in terms of the PE ratio. At issue is the Price has been factored by the cash horde, but the Earnings for the cash are very crappy.

    Think of it this way, suppose Apple had a business with a market cap of $300 billion and $100 billion in cash (I’m using simple hypothetical numbers to make the point). If this were the case, Apple’s business without the cash would be $200 billion and the cash would be $100 billion (literal cash value). However, the return on the $200 billion Apple business is huge each year, while the earning on the $100 billion are insignificant (actually an opportunity loss). Where would you want to invest your money in…the $200 Billion Apple business or the $100 Billion cash business managed by Apple?

    So what happens is the market cap is factored in by adding the cash on hand, but earnings growth relative to the market cap is actually held back by the cash on hand since the cash is non-performing.

    This is all ok though. Apple will continue to be a strong stock, but don’t expect it to continue to have the PE ratios it used to have or even anywhere close to the PE ratios it deserves.

  7. A 3% dividend would cost Apple about a billion a year and should catapult the stock price. There is no reason parting with that amount of money would hurt the company. It does reward all the longterm owners. I’d much rather own my AAPL forever than need to sell any of it to enjoy the benefits of ownership.

  8. I would like to know what company could afford to buy Apple even at 200M? Even Exxon would have to trade 2/3 of its value.

    The low price value is because brokers are pushing the stock down prior to buying positions. Then after the earnings release tomorrow they will pump up the stock to unparalleled heights.

    It’s a sure bet. Apple stock is manipulated by rumors spread by a bunch of analysts and players in the market. The result is they can make guaranteed money whenever they need to. It’s easy – everyone knows Apple is going to post fantastic results. Their balance book is phenomenal and unmatched by any other company.

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